The 2.0 Control Paradox

There is a fundamental tension in Web/Media 2.0 between openness and control — openness is required to leverage the network effect of the Web and harness the power of socially-connected users, but control is required to get a share of any money that changes hands.

Google has been most successful in walking this line — AdWords advertisers and AdSense publishers have a great degree of control over the system, but only to a point. Google still owns the system, and everyone needs to play by Google’s rules — and pay Google its share (which is undisclosed, i.e. obsessively controlled). Google shares just enough revenue with AdSense publishers to exceed other revenue sources — but only just enough.

Yet despite Google’s runaway success, they have struggled recently with this balancing act, as click fraud and other abuses test the limits of openness.

This tension between technological structure and economic interest has been one of the main formative forces influencing the commercial internet since profit-making players first appeared. But it has become even more salient with the rise of Web 2.0, which amplifies openness at the technological level (by encouraging the free flow not only of the user’s attention but also of underlying data and applications) while at the same time increasing the economic rewards for keeping the user within a particular site (by making advertising even more important to profit-making).

â€œIf you look at virtually any Web 2.0 application, whether its YouTube, whether itâ€™s Flicker, whether itâ€™s Photobucket or any of the next-generation Web applications, almost all of them are really driven off the back of MySpace,â€� Chernin said at the conference. â€œThereâ€™s no reason why we canâ€™t build a parallel business.â€�

There was a great uproar in the blogosphere over MySpace’s will to control, but how else are they going to make money off their own ecosystem unless they control the businesses that feed off it?

The new venture, called the National Broadband Company, or NBBC, will have content from NBCâ€™s networks and local stations as well as from other companies. That programming will appear on NBCâ€™s own Web sites as well as other sites.

Commercials will be inserted before each video segment, with the revenue split among the programâ€™s creator, the Web site owner and NBBC.

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For now, NBBC is going to keep a distance from the hottest trend in online video â€” programs created and uploaded by users. The company wants to work only with established producers, although it will feature programs from companies like Break.com that are edited selections of the best amateur videos.

Similarly, NBBC is not going to allow the programs it distributes to be inserted on personal blogs or Web pages, although it might work with well-established high-traffic blogs.

They will not allow us, the people, to put stuff on our blogs. They want control.

They will not accept video from us the people. Not up to their standards.

They take a shameful share of the revenue: 50 percent (30 percent goes to the videoâ€™s creator, 20 percent to the site running the video).

The future of 2.0 economics — who wins the Google-sized pots of gold — will hinge on solving the control paradox.

Should NBBC let any site host their videos? Then what about the “made for AdSense” crowd who will approach it as a pure profit maximizing venture, even if it doesn’t maximize value for the advertisers?

Itâ€™s not just that brand advertisers are concerned about quality for brandingâ€™s sakeâ€“we ran a Fortune 500 financial services clientâ€™s ads on an AOL content program and because there were not enough quality controls, our client was exposed to $2.5M in compliance liability. Without a controlled environment companies also expose themselve to legal risks, which can have a much more tangible and immediate negative impact than brand erosion.

How does the ideology of openness deal with legal liability? Are all the users going to chip in to pay the legal bill?

And, to the bottom line, should NBBC share more revenue? Does someone other than the content creator and the content distributor deserve 50% of the revenue? In the case of AdSense, Google is merely a broker, like NBBC — are they taking 50%? (Again, Google is enough of a control freak not to let such information leak out as NBBC did.)

The Google approach to revenue sharing is not to approach it as a matter of principal, but as a matter of profit maximizing — share too little revenue, and there won’t be enough profit motive in the network to optimize the system.

It’s easy to criticize NBBC and MySpace for not taking 2.0 ideological openness to the extreme, but the truth is that nobody has demonstrated yet how to maximize profits while ceding all control. Google, for all the leveraging of open architecture and network effects, is a notorious control freak — and their success is driven by figuring out how much to control.

Absolute openness makes for great ideological dogma, but until someone convincingly demonstraes how absolute openness without any control makes for great business, I’m going to stake my tent next to Google in the DMZ between the land of openness and the land of control.